Blockbuster morphing into home, online delivery business

As Amazon and Netflix continue to plan their moves into online movie delivery …

Comments by Blockbuster CEO John Antioco in the company's 2005 earnings report and the accompanying conference call indicate that the video rental giant is planning to offer downloadable rentals as soon as it can find a way to make money from that:

"The challenge with downloading is there isn't a profitable business model that exists. We are very interested in the space," he said. "If digital delivery is out there we ought to be playing a role in it. If we aren't, then something's wrong."

The company is already dipping its toes into the online delivery waters, as it's one of the major investors in CinemaNow, alongside companies like Microsoft and Cisco (footnote: is there any doubt that Cisco wants to be the center of your living room?). Today, that service competes with several budding movie download starlets: Disney's MovieBeam; MovieLink, run by a consortium of major Hollywood studios; and Vongo from the Starz network. But none of these offerings have become household names yet. Slapping the Blockbuster name on a bona fide rental service would be a good way to get the attention of the unwashed masses.

But Antioco's baby isn't alone in wanting a slice of that pie. Amazon has moved on from the minor leagues and is now talking to Warner, Universal, and Paramount about getting the rights to distribute their films online. All three of these studios are part of the MovieLink consortium, which sparks the question of whether Amazon is planning to pay up for that service rather than trying to roll its own.

Rental-by-mail leader Netflix is also raring to go; CEO Reed Hastings has repeatedly stated that his company has a technical solution ready, but that ongoing negotiations with the movie producers are holding back the launch. It looks like the bricks-and-mortar style video rental business is about to become relegated to a niche role, with the occasional store left behind just to service the creatures of habit and the Luddites among us.

Blockbuster will close 150 stores this year, according to the earnings report, but Antioco still thinks that BBI will "outperform the domestic rental industry in 2006." Way to set the bar high, John. Movie Gallery, the second-largest rental chain in the US, bought #3 Hollywood Video last year with borrowed money, and the combined company is now begging its debtors for relief, as it can't afford the interest payments:

"With no future cash flow generation in our forecasts, we believe that there may be no residual value for equity holders in a bankruptcy scenario," Bear Stearns said in a research report.

It's a tough spot to be in, and Blockbuster is counting on increasing its market share as Movie Gallery should close stores faster than Blockbuster does. Antioco wants to compete with Netflix in the home delivery business, and he is looking for online opportunities as well. The Blockbuster of tomorrow may well be very different from the company you have come to know and love/hate.